In collaboration with

MIT Forum
For Supply Chain Innovation

2013

MIT and PwC Research Study

Supply Chain and Risk Management

Making the right decisions to strengthen operations performance.

Supply Chain and Risk Management

Study by MIT Forum for Supply Chain Innovation and PwC

Authors
Prof. David Simchi-Levi, MIT Department of Civil and Environmental Engineering and the Engineering Systems Division, Massachusetts Institute of Technology

Ioannis M. Kyratzoglou System Design and Management Fellow, Massachusetts Institute of Technology

Constantine G. Vassiliadis Principal Manager, PwC, The Netherlands

Copyright Massachusetts Institute of Technology, 2013. All rights reserved. For more information or permission to reprint, please contact the MIT Forum at: E-mail: LSheppar@MIT.EDU Phone: 1-617-852-2708
The Future of Risk: 5 Key Principles2

Table of Contents

INTRODUCTION EXECUTIVE SUMMARY WHEN MATURE RISK MANAGEMENT AND OPERATIONAL RESILIENCE PAY OFF OBJECTIVES OF STUDY THE CHALLENGES OF AN EXTENDED GLOBAL SUPPLY CHAIN WHAT ARE THE DRIVERS OF SUPPLY CHAIN OPERATIONS COMPLEXITY? WHAT ARE THE SOURCES OF SUPPLY CHAIN RISK? WHAT PARAMETERS ARE SUPPLY CHAIN OPERATIONS MOST SENSITIVE TO? HOW DO COMPANIES MITIGATE AGAINST DISRUPTIONS? THE SUPPLY CHAIN AND RISK MANAGEMENT MATURITY FRAMEWORK STRENGTHEN SUPPLY CHAIN AND RISK MANAGEMENT FOUR LEVELS OF MATURITY IN SUPPLY CHAIN OPERATIONS AND RISK MANAGEMENT HOW MATURE ARE COMPANY CAPABILITIES? KEY INSIGHTS - MORE MATURE CAPABILITIES LEAD TO BETTER OPERATIONAL PERFORMANCE APPENDIX A: SURVEY DEMOGRAPHICS AND TRENDS APPENDIX B: KEY PERFORMANCE INDICATOR DEFINITIONS ABOUT THE PROJECT TEAM ABOUT THE MIT FORUM FOR SUPPLY CHAIN INNOVATION 12 13 16 8 9 10 11

4 5 6 7 7

12

17 25 29 31 32

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Supply Chain and Risk Management

Introduction

This study analyses the supply chain operations and risk management approaches of large companies and looks at their operations and financial performance in the face of supply chain disruptions. It proposes a framework and a set of principles to help companies manage todays risk challenges and prepare for future opportunities. Using the framework, a companys leaders can increase their awareness of where they and their competition stand.

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Execut tive Sum mmary

F for Supply S Cha ain Innovatio on and PwC C Global Supply Chain n and Risk The MIT Forum Managem ment Survey y is a study y of the supply chain operations a and risk ma anagement approaches of 209 companies c s with a glo obal footpr rint. As glob bally opera ating organis sations, they are exposed e to high-risk sc cenarios ra anging from m controllable risks, suc ch as raw m material price fluct tuation, cur rrency fluctu uation, mar rket change es or fuel pr rice volatilit ty, to uncon ntrollable ones such h as natura al disasters. . The findin ngs validate e five key principles p that t compa anies can le earn from to o better manage todays ris sk challeng ges to their supply chains and pre epare for future opport tunities: 1. Su upply chain disruptions s have signi ificant impa act on com mpany bus siness and financial f pe erformance. . 2. Co ompanies with w mature supply cha ain and risk ma anagement capabilities s are more resilient to supply cha ain disrupti ions. They are a impacte ed less and d they rec cover faster r than comp panies with h immature capabilities s. 3. Ma ature compa anies inves sting in supp ply chain fle exibility are e mo ore resilient t to disruptio ons than mature m comp panies that t do not invest in supply chain c flexibil lity.
In the past twel lve months, more than 60% % of the comp panies survey yed said that their performance e indicators dropped by 3 3% or more had d as a result of supply chain disrup ptions.

4. Ma ature compa anies inves sting in risk segmentat tion are mo ore resilient to disruptio ons than ma ature compa anies that do d not inves st in risk se egmentation n. 5. Co ompanies with w mature capabilities s in supply chain and r risk manag gement do b better alo ong all surv veyed dimen nsions of op perational a and financia al performa ance than im mmature com mpanies. ty maturity referred to o in the above five prin nciples was determined d using our r supply Capabilit chain and d risk man nagement capability c maturity m fr ramework. This frame ework asses sses the degree to o which com mpanies are e applying the t most eff fective enablers of sup pply chain r risk reduction (e.g., flexib bility, risk governance, , alignment t, integration, information sharing, data, s, and ratio onalisation) and their a associated p processes. The mode el models and analytics w a com mpany stand ds in relatio on to its com mpetition an nd the rest of the industry. depicts where According g to the sur rvey results, as many as a 60% of t the compan nies pay on nly marginal attention to risk redu uction proce esses. The ese compan nies are cat tegorised a as having im mmature risk proce esses. They y mitigate ri isk by eithe er increasing g capacity or strategic cally positio oning additional l inventory. This is no ot a surprise e as the sur rvey also sh hows that m most of thes se companie es are focus sed either on o maximising profit, m minimising c costs or ma aintaining s service levels.
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 The remaining 40% do invest in developing advanced risk reduction enabler capability and are classified as having mature processes. Our research validated that companies with mature risk processes perform operationally and financially better something for CEOs and CFOs to note. Indeed, managing supply chain risk is good for all parts of the business product design, development, operations and sales. Using the capability maturity model, companies can benchmark their ability to respond to risks, and then increase their capability maturity to gain competitive advantage.

When mature risk management and operational resilience pay off

On March 11, 20111, Nissan Motor Company Ltd and its suppliers experienced a 9.0magnitide earthquake as it struck off the East coast of Japan. The quake was among the 5 most powerful earthquakes on record. Tsunami waves in excess of 40 meters travelled up to 10km inland causing a Level 7 meltdown at three nuclear reactors at Fukushima Daiichi. The impact of this multi-headed disaster was devastating. 25,000 people died, went missing or were injured. 125,000 buildings were damaged and economic losses were estimated at $200 billion. In the weeks following the catastrophic earthquake, 80% of the automotive plants in Japan suspended production. Nissans production capacity was perceived to have suffered most from the disaster compared to its competitors. Six production facilities and fifty of the firms critical suppliers suffered severe damage. The result was a loss of production capacity equivalent to approximately 270,000 automobiles. Despite this devastation, Nissans recovery was remarkable. During the next six months, Nissans production in Japan decreased by only 3.8% compared to an industry wide decrease of 24.8%. Nissan ended 2011 with an increase in production of 9.3% compared to a reduction of 9.3% industry wide. How was Nissan able to successfully navigate a disruption of this magnitude so successfully? 1. To begin with, Nissan responded by adhering to the principles of its risk management philosophy. It focused on identifying risks as early as possible, actively analysing these risks, planning countermeasures and rapidly implementing them. 2. The company had prepared a continuous readiness plan encompassing its suppliers including: an earthquake emergency response plan; a business continuity plan; and disaster simulation training. Nissan deployed these advanced capabilities throughout risk management and along the supply chain. 3. Management was empowered to make decisions locally without lengthy analysis. 4. The supply chain model structure was flexible, meaning there was decentralisation with strong central control when required. This was combined with simplified product lines. 5. There was visibility across the extended enterprise and good coordination between internal and external business functions.

1 Nissan

Motor Company Ltd: Building Operational Resiliency: William Schmidt, David Simchi-Levi, MIT Sloan Management: Case Number 13-150

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 These capabilities allowed the company to share information globally, allocate component part supplies on higher margin products and adjust production in a cost-efficient way.

Objectives of Study
Counter-intuitive stories such as the Nissan story are at the heart of this study. It illustrates that companies such as Nissan with highly mature capabilities in both supply chain management and risk management will be able to effectively address risks, outperform the market and even gain competitive advantage. We believe that linking the customer value proposition, sound supply chain operations, and robust risk management is key to success. Moreover, there are supply chain and risk management principles, frameworks, and processes that enable companies to address complex market challenges and achieve superior performance. The MIT Forum for Supply Chain Innovation and PwC launched the Supply Chain Risk Management Survey to assess how global organisations address these challenges and their impact on business operations. The survey was distributed to members of the MIT Forum for Supply Chain Innovation and world-wide clients of PwC. In total, 209 companies completed the survey. Appendix A characterizes the participant population.

The challenges of an extended global supply chain

When a company expands from a local or regional presence to a more global one, the operations strategy needs to be adjusted to align with the changes. The economic crisis in Europe is a good example of this. Due to the decrease in demand for many products and services in the continent, companies are changing strategies, seeking alternate global markets. Thats when operations become more complex. Transportation and logistics become more challenging, lead times lengthen, costs increase and end customer service can suffer. With a more a global footprint, different products are directed to more diverse customers via different distribution channels, which require different supply chains. To address the challenge successfully, there are a number of questions companies need to consider as their operations globalise: 1. What are the drivers of supply chain complexity for a company with global operations and how have they evolved over the recent past? 2. What are the sources of supply chain risk? 3. How can vulnerability and exposure to high impact supply chain disruptions be properly assessed and managed? 4. How can supply chain resilience be improved? 5. What supply chain operations and risk principles will guide the improvement of the companys bottom line: the operations and financial performance?
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 Through this t researc ch, we aim to provide valuable v ins sight in res sponse to th hese questi ions. What are e the driver rs of suppl ly chain op perations c complexity y? Supply ch hains are ex xposed to both b domes stic and inte ernational risks. The m more complex the supply ch hain, the les ss predictab ble the likelihood and t the impact of disruptio on. In other r words, exposure to risk is potentially higher. We asked surv vey participa ants their v views on ho ow certain ke ey supply ch hain comple exity driver rs have evo olved over the past thre ee years. T The responses are show wn in Figure 1.

Fig gure 1. Evolution of supply chain c complex xity over the p past three yea ars

Over rece ent years, th he size of the supply chain c netwo ork has incr reased, dep pendencies s between entities e and d between functions f ha ave shifted, the speed d of change e has accele erated and the le evel of trans sparency has decreas sed. d a product and a getting it to the ma arket requir res more co omplex supply Overall, developing chains ne eeding a hig gher degree e of coordin nation.

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What are e the sour rces of su upply chai in risk?

Risks to global g supply chains va ary from kn nown-unkno owns and c controllable, to unknow wn2 unknowns s and uncontrollable ones o . In the e Nissan Ca ase, the de evastating n natural disa asters were unknown-unknowns (diffic cult to quan ntify the like elihood of occurrence) and uncon ntrollable not manage e the expec cted risk and d its impact t). (you cann To unders stand the le evel of expo osure to div verse and b broad rangin ng sources s of risk, we e asked survey pa articipants to identify th he sources of risks fac ced by their r supply cha ain. The res sults are shown in Figure 2.

Figure 2. 2 Survey participants view on sources o of risks faced b by their suppl ly chain

s, with the exception e o of environm mental catas strophes, are Interestingly, all the top six risks nknowns an nd controlla able to some e degree. known-un

Operation ns Rules: De elivering Val lue Through Flexible Op perations, Da avid Simchi-Levi, 2010, The MIT Press.
2

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What pa arameters are supply chain operations o s most sensitive to? ?

Responde ents replied d that their supply s chain operation ns were mo ost sensitive e to skill se et and expertise (31%), pric ce of comm modities (29%), energy y and oil (28 8%), see Fi igure 3. As an exa ample of the e energy an nd oil param meter, acco ording to the e Departme ent of Ener rgy Informatio on Administ tration, U.S S. diesel pric ces rose 9. .5 cents per gallon in F February 20 012. Cognizan nt of the sen nsitivity and d impact die esel prices can have o on their fina ancial bottom m line, shippers adjust a their r budgets in n order to of ffset the inc creased cos sts higher f fuel prices p produce.

Figure F 3. Parameters to which survey par rticipants sup pply chain ope erations are m most sensitive

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How do companie es mitigat te against disruptio ons?

What kind d of actions s do our sur rvey respon ndents curre ently take t to reduce th he exposure e of their supply ch hain to potential disrup ptions or to mitigate the e impact? N Nissan had a well-thou ught out and exerc cised business continu uity plan rea ady to kick into action to facilitate e a quick re ecovery. And indee ed 82% of responders r s said they had h busine ss continuit ty plans rea ady. See Fi igure 4.

Figure 4. Actions A compan nies take to mi itigate supply chain risk

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The supply chain and risk management maturity framework

Strengthen supply chain and risk management
As Nissan illustrated, to reduce vulnerability and exposure to high impact supply chain disruptions, companies need advanced capabilities along two dimensions: supply chain management and risk management. But how can they understand the maturity level of their capabilities in these areas before designing ways to strengthen them?

The seven supply chain and risk enablers of maturity

There are seven factors that enable stronger capabilities in both supply chain management and risk management. By matching their practices against these seven enablers companies can assess how mature or immature their capabilities are. This is the basis of our Supply Chain and Risk Management Maturity Model an empirical framework that applies set questions across the seven enablers. For each of the seven enabling areas, we asked survey respondents to answer questions concerning the extent to which they have implemented gradually advancing practices. The more developed the practices are, the more advanced the capabilities. The seven enablers are: 1. Risk Governance - the presence of appropriate risk management structures, processes and culture. 2. Flexibility and redundancy in product, network and process architectures having the right levels of flexibility and redundancy across the value chain to be able to absorb disruptions and adapt to change. 3. Alignment between partners in the supply chain strategic alignment on key value dimensions, identification of emerging patterns and advancement towards higher value propositions. 4. Upstream and downstream supply chain integration information sharing, visibility and collaboration with upstream and downstream supply chain partners. 5. Alignment between internal business functions alignment and the integration of activities between company value chain functions on a strategic, tactical and operational level. 6. Complexity management/rationalisation ability to standardise and simplify networks and processes, interfaces, product architectures and product portfolios and operating models. 7. Data, models and analytics development and use of intelligence and analytical capabilities to support supply chain and risk management functions. According to our survey, companies consider alignment between partners in the supply chain as the most important factor in enabling risk reduction (60%), see Figure 5.
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 Internal and external process in ntegration is s also very important ( (49%) and (47%). Risk governance (44%) and a network k flexibility and a redund dancy (37% %) are also b being includ ded in the mix. Finally, F despite recent advances, data, mode els and ana alytics (28% %) and com mplexity managem ment / ration nalisation (2 26%) are lo ow on the p riority list. As analytic cs continue to mature, th his may cha ange.

Figure 5. Survey participants s view on which capability e enabler they c consider the m most importan nt

vels of maturity in supply s cha ain operat tions and risk mana agement Four lev
Supply ch hain operations and ris sk managem ment proce esses go ha and-in-hand d and comp plement one anoth her. At lower maturity levels the processes are decoup pled and sta and-alone b but at high matu urity levels they t are ful lly intertwined. For dev veloping an nd deploying capabilities to manage supply s chain risk effec ctively, a hig gh level of s supply chai in sophistic cation is an absolute pre-requis site. There are e four levels s of supply chain and risk r manag ement proc cess maturity: Level I: Functional supply ch F hain manag gement and d ad-hoc m manageme ent of risk. Supply chains are e organised d functionally with a ve ery low deg gree of integ gration. Th hey are character rised by high duplicatio on of activit ties, interna ally and exte ernally disc connected processes s and an ab bsence of coordinated c d efforts with h suppliers and partne ers. Produc ct design is perform med independently and d there is lit ttle visibility y into partne ers/supplier rs operation ns. Inventory and capac city levels are unbalanc ced leading g to poor cu ustomer service and h high total costs. Th here is no ri isk governa ance structu ure and poo or visibility into source es of supply y chain risk. Only y very limited vulnerability or threa at analysis is performe ed. Risk is m managed in n an adhoc way with w no prio or anticipatio on or positioning of re esponse me echanisms.

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Level II: Internal supply chain integration and positioning of planned buffers to absorb disruptions. Supply chains are cross-functionally organized. Internal processes are integrated, information is shared and visibility is provided between functions in a structured way. Resources are jointly managed and there is a higher level of alignment between performance objectives. Integrated planning is performed at strategic, tactical and operational levels that leads to a single company plan. Risk management processes are documented and internally integrated. Basic threats and vulnerabilities are analysed. Scenarios concerning the base integrated plan are conducted to position targeted buffers of capacity and inventory to absorb disruptions. Postponement or delayed differentiation product design principles are explored to improve response to changing demand patterns. There is minimum visibility, however, into emerging changes and patterns outside the company. Level III: External supply chain collaboration and proactive risk response. Supply chains feature collaboration across the extended enterprise. Information sharing is extensive and visibility is high. Key activities such as product design or inventory management are integrated between supply chain partners. External input is incorporated into internal planning activities. Interfaces are standardised and products and processes are rationalised to reduce complexity. Information sharing and visibility outside the company domain is exploited to set up sensors and predictors of change and variability to proactively position response mechanisms. Formal quantitative methodologies for risk management are introduced and sensitivity analysis is conducted. Suppliers and partners are monitored for resilience levels and business continuity plans are created. Level IV: Dynamic supply chain adaptation and fully flexible response to risk. Companies are fully aligned with their supply chain partners on the key value dimensions across the extended enterprise. Their individual strategies and operations are guided by common objectives and fitness schemas. Their supply chain is fully flexible to interact and adapt to complex dynamic environments. Emerging value chain patterns resulting from this interaction are probed and identified and higher value equilibrium points are achieved. At this level, the supply chain is often segmented to match multiple customer value propositions. Risk sensors and predictors are supported by real-time monitoring and analytics. Risk governance is formal but flexible. Full flexibility in the supply chain product, network and process architecture and short supply chain transformation lead-times allow quick response and adaptability. Supplier segmentation is performed. Risk strategies are segmented based on supplier profiles and market-product combination characteristics.

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 Table 1 summarizes the criteria used as a basis for the questions and the maturity levels.

Supply chain management

Risk management

Functional Internallyandexternallydisconnectedplans andprocesses Lackofvisibilityintosupplier/partner operationsandbusinessdata Resourcesarelocallyownedandmanaged Performanceismeasuredseparatelybasedon functionalkeyperformanceparameter(KPIs) Integrated Internallyalignedandintegratedfunctions Informationsharingandplanningactivities betweeninternalfunctions Postponementstrategyused Supplychainperformancemeasured Collaborative Externalandinternalcollaboration Visibilityandinformationsharingbetween supplychainpartners Fullintegrationofkeyfunctions Incorporationofexternalinputintointernal planningactivities Supplychainrationalisation Performancemeasuredandforecasted Dynamic Dynamicsupplychainadaptationtovalue chainchange Fullenterpriseintegration Fullupstreamanddownstreamvisibility Completealignmentonkeycustomervalue dimensionsacrosstheenterprise Sophisticatedoperationsmodelsinuse Supplychainsegmentationmatchesmultiple customervaluepropositions Adhoc Adhocriskmanagementprocesses Productdesignisperformedindependently Absenceofcommonstandardsand processes Noplanningofredundancybufferstowards potentialdisruptions Canabsorbonlylimitedvolatilityaround standardfunctionalinputparameters Bufferplanning Anticipatoryriskplanning Buildcapacity/investininventory Positionredundancybuffersbasedona commoncrossfunctionalplan Basicriskgovernanceprocesses Proactive Proactiveriskmanagement Quantitativeriskmanagement BusinesscontinuityplansPartnerresilience monitoring Useofsensorsandpredictorstoproactively positionresponsemechanisms

LevelI LevelII LevelIII LevelIV

Lessmature Moremature

Flexible Investinflexibility(processes,products, plants,capacity) Manageriskpressureawayfromweak suppliers Commonstandardsandprocesses Timelysupplychainbottlenecks management

Table 1. Capability maturity classification model

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How mature are company c capabilitie c es?

ework is a useful u tool in evaluatin ng each com mpanys ca apabilities. Importantly y, The frame according g to our stud dy, it shows s that the majority m of th he compan nies have im mmature supply chain ope erations and d risk mana agement pro ocesses in place. See e Figure 6. Specifical lly, of the co ompanies surveyed, s only o 41% were classifie ed as havin ng mature processes s, based on n their responses. 59% % of compa anies have i immature p processes in n place to effectiv vely address incidents. Only a minority of co ompanies (9%) are ful lly prepared d to address potential p challenges fro om supply chain c disruptions in in ncreasingly complex environments.

Figure 6. 6 Capability le evel company classification n profile

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Key ins sights - More mature m ca apabilities lead to bette er opera ational perform mance
Having as ssessed the e maturity le evels of the e 209 comp panies in the survey, w we then ana alysed their business and operational o performanc ce indicator rs over the last 12 mon nths. Our a aim was to unders stand the im mpact of disruptions on n mature vs s. immature e companies s. The indica ators cover r a wide spe ectrum of company pe erformance including p profitability, efficiency y and servic ce. Both the e scale of th he impact, a and the time it took to recover to prior or improved levels of performance e, were mea asured. e the key in nsights from m the 209 co ompanies s surveyed: These are 1. Supply y chain dis sruptions have h a sign nificant impact on co ompany bu usiness and financial performan nce To better understand d the impac ct of disrupt tions3, we a assessed th he performa ance of com mpanies d at least th hree disrupt tive incidents over the last twelve e months. If f performan nce that faced indicators s were nega atively affec cted by 3% or higher, t this was co onsidered s significant i impact. As Figure e 7 illustrate es, 54% sa aid that sale es revenue was negati ively affecte ed and 64% % suffered a decline in their custo omer service levels. Ac cross all the e operation nal KPIs exa amined, at least 60 0% reporte ed a 3% or higher h loss of value. The importance of having matu ure capabilit ties in place e to deal with supply c chain disrup ptions is clear.

Figure 7. Percentage P of companies th hat suffered a 3% or higher impact on the eir performanc ce indicators a as a result of supp ply chain disru uptions in the past twelve m months.

3 Informatio on about disru uption impacts s is selfreport ted by survey y participants

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 2. Compa anies with mature su upply chain n and risk manageme ent proces sses are more resilient to disrupti ions than those t with immature processes s According g to the sur rvey results, companie es with matu ure (maturit ty levels III & IV) supp ply chain and risk managemen m nt processe es are more e resilient to o disruption ns than com mpanies wit th immature (maturity le evels I & II) ) processes s. The more e mature co ompanies s suffer lower r impact and enjoy y faster reco overy. Figure 8 shows the percentage e of compan nies with m more than 3 incidents th hat suffered d an impact of 3% or high her on their performance as a res sult of supply chain dis sruptions in n the last twelve mo onths. Only 44% % of the com mpanies wit th mature processes p s suffered a 3 3% or more decline in their revenue compared c to 57% with h immature processes. . The highe er resilience e trend for mature companie es is commo on for all th he KPIs exa amined. The e difference e is striking in key area as such as total su upply chain n cost, orde er fulfilment lead times and lead-time variability. These KPIs are amon ng those mo ost heavily impacted by b supply ch hain disrupt tions, so mature comp panies gain a dis stinct advan ntage by inv vesting in th he propose ed set of cap pabilities.

Fig gure 8. Perform mance KPI res silience to dis sruptions betw ween more ma ature and less maturity leve els

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 3. Mature e companie es that inv vest in supply chain f flexibility a are more re esilient to disruptio on than ma ature comp panies that t dont Flexibility is critical to o a compan nys ability to t adapt to change. A greater de egree of flex xibility in their businesses will allow companies to better b respo ond to dema and change es, labour s strikes, technolog gy changes, currency volatility, v vo olatile energ gy and oil p prices. How wever, flexibility does not come free and a the hig gher the lev vel of flexibi lity the mor re expensiv ve it is to ac chieve. Similarly, achieving a higher lev vel of servic ce can be c costly. Its a difficult tr rade-off bet tween the desire e to minimis se costs vs. investing in flexibility y or increasing customer service l levels. We asked d the respondents to id dentify the key supply chain value e drivers fo or their lead ding customer value prop position. High custome er service l evel (34%) and flexibility (27%) w were cited as th he top two drivers follo owed by co ost minimisa ation (22%) ) and efficie ent use of in nventory (14%). Se ee Figure 9. 9

Figur re 9. Key supp ply chain value e driver to mat tch customer value propos sition

Two distin nctive groups emerge from this re esponse: The cost-effic cient group - mature co ompanies th hat selected cost or ef fficiency as s their key y supply ch hain value driver. d Th he flexible-re esponse gr roup - mature compan ies that sel lected flexib bility or cus stomer ser rvice levels s as their ke ey supply ch hain value driver. When we compared the perform mance resil lience of these two gro oups, we le earned that the flexible-re esponse gro oup fared significantly s ance of cost t-efficient better. The performa companie es suffered more from the change es and disru uptions in t their supply y chain even n though they poss sess mature e capabilitie es in deploy ying their st trategy. Ma ature comp panies inves sting in flexibility, responsive eness and customer c se ervice, dem monstrate h higher perfo ormance res silience d to companies whose e strategies emphasise e cost and e efficiency, compared Figure 10 0 highlights s the major differences s.
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Figure 10. Difference e in performan nce resilience between matu ure cost-effici ient and mature flexible-res sponse companies.

Figure 10 0 also illustrates that th he largest majority m of c cost-efficient compani ies (80%) fa ace high variability y in their sup pply chain lead l times once o a sup pply chain d disruption ta akes place. This is interesting g given that low variab bility is one of the key drivers of a an efficient operating s strategy.

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 4. Mature e companie es that inv vest in risk segmenta ation are m more resilie ent to disru uptions than mat ture compa anies that dont d Companie es with diffe erent marke et value pro opositions p prioritise dif fferent value dimensio ons in their supp ply chains. Today, T com mpanies ofte en target different market segme ents and the erefore have seve eral custom mer value pr ropositions. For exam ple, one pa art of the pr roduct portfo olio may emphasis se price as key differen ntiator while e another e emphasises s product in nnovation or product selection and availab bility. We asked d our survey responde ents to identify the key y value dime ension of th heir leading g customer value prop position. The top th hree choice es were: Qu uality (23%) ), Innovatio on (14%) an nd Price (14 4%). See Figure 11 1.

Figu ure 11. The key y value dimen nsion of the leading custom mer value prop position of sur rvey participan nts.

v propo ositions and a the corr responding operating s strategies - do not nec cessarily Different value have the same risk profile. p Valu ue dimensio ons are not t exposed to o the same e threats an nd vulnerabil lities. As a result, the manageme m ent of supply y chain risk k exposur re reduction n and mitigation n strategies may nee ed to vary significantly based on t the value dimension. Consider a value pro oposition em mphasising g product innovation. T The high sp peed of innovation, the corres sponding lo ower foreca ast accuracy y, the highe er price risk k and the higher supply y risk will essen ntially determine the ty ype of strate egy the com mpany depl loys with its s supplier. If the price risk or supply risk r is highe er as a resu ult of the sp peed of inno ovation then n it is more likely that flexib ble risk-sharing contrac cts, rather than t a build d-up of inve entory buffe ers is appro opriate. Thus, risk k strategies s needs to be b segment ted according to the va alue driver. .

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 We asked d survey res spondents whether the ey actively pursued ris sk strategy segmentat tion. Almost 60 0% do and 40% dont. See Figure 12 2.

Figure e 12. Percenta age of compan nies that perfo orm risk strate egy segmenta ation.

We asked d the 59% of o companie es that purs sued risk se egmentatio on, What pr roduct differentia ators do you u use as a basis for ris sk strategy segmentat tion? The top three c choices were: stra ategic impo ortance (56% %), demand d volatility ( (52%) and s sales volum me (45%). See Figure 13 3.

Figure F 13. Key product differentiators for risk strategy segmentation n

Companie es with mat ture capabilities were clustered in nto two main groups: t those that p perform risk strate egy segmen ntation and those that dont. We then comp pared the pe erformance e resilience e to supply chain c disruptions for both b groups s.

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 We obser rved that mature comp panies investing in risk k segmenta ation based on differen nt value propositio on demonst trate higher r performan nce resilienc ce than com mpanies tha at do not in nvest in risk segm mentation. Figure 14 4 highlights s the major difference between b the two groups across o operations a and financial performanc p ce indicators s. Of partic cular note is s in the sale es revenue e category. Only 32% of th he mature companies c that t segme ent their risk k managem ment strateg gy were sign nificantly impacted as a result t of incident ts that occu urred. This c compares t to 70% of m mature com mpanies that dont segment - a 38% diffe erence!

Figure 14 4. Difference in n performance e resilience ba ased on risk s strategy segme entation.

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 5. Compa anies with mature ca apabilities in supply c chain man nagement a and risk managem ment do be etter along all survey yed dimens sions of op perational and financ cial performa ance than immature i companies c s We comp pared how company c op perations and financia al performan nce differed d between t the mature an nd immatur re companie es over the e prior 12 m months. As F Figure15 highlights, companie es with mature capabilities in supply chain a and risk man nagement d do better al long all surveyed dimensions of operational and financial per rformance. This findin ng suggests that there e is a direct link between having m mature sup pply chain a and risk managem ment capabilities and higher h overa all performa ance.

Figu ure 15. Busine ess and financ cial performan nce difference e between mat ture and imma ature companies

rity evaluation will enable compan ny executiv ves to gain insight into the risk The capability matur position and a maturity y of the com mpany mea asured in te erms of their operations and finan ncial performan nce.

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Appendix A: Survey S demogra d aphics a and trend ds

The majo ority of the 209 2 survey participants s are from E Europe. Fig gure 16 illu ustrates the e geograph hical distribu ution of surv vey particip pants accor rding to whe ere their he eadquarters s are based.

Figure 16. Distr ribution of survey participa ants headquarters by region

Figure 17 7. Distribution n of survey pa rticipants by i industry

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 Distributio on of all par rticipating companies c based on th heir 2011 re eported sales revenue es.

Figure 18. Distr ribution of sur rvey participan nts by annual sales revenue

The majo ority of surve ey participa ants (64%) are manufa acturing com mpanies.

Figure 19. 1 Percentage e of manufactu uring vs. non-manufacturin ng survey com mpanies

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 83% of th he participat ting compa anies have their t manuf facturing op perations dispersed in multiple geograph hic regions while w only 17% 1 have them t in the same regio on as their headquarte ers.

Figu ure 20. Distrib bution of Companies by sca ale of operatio ons globalizati ion

With 83% % of the com mpanies hav ving operat tions across s regions w we examine ed how the s split of operations volume by b regions compares c with w the spli t of their sa ales volume e by region to get an indicat tion for the use of regional vs. glo obal operat ions strateg gies to mee et demand. For the last 12 mo onths, we observe o tha at sales vs. operation v volumes pe er region ar re mostly aligned indicating g use of regional strate egies by sur rvey participants.

Figure F 21. Com mparison betw ween manufac cturing operati ions volume a and sales volu ume by region n

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 This is a comparison c n between the t current and the fut ture expect ted operatio ons volume e in 2015 by region based on the t expecta ation of surv vey particip pants. America operations remain n constant. A 3 perce ent growth is shown fo or Asia and a correspo onding 2 pe ercent decline for Euro ope indicating g a shift of operations o from f Europe to Asia.

Figure 22. 2 Compariso on between cu urrent vs. futur re expected o operations by v volume

ent vs. futur re expected d sales volu umes in 201 15 by region n based on n the expect tation of The curre survey pa articipants are a compar red in Figur re 23. Survey pa articipants expect e a dr rop in their sales s volum me in Europ pe by 2015 and increa ase in sales volu umes in mo ost of the ot ther world regions r with h Asia, Midd dle East & A Africa contributing the biggest part.

Figure 23 3. Comparison n between curr rent vs. future e expected sal les volumes b by region

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Appendix B: Key performance indicator definitions

The key operations 4 and financial performance indicators used in this study are described below: Market value: The current market value of a company is the total number of shares outstanding multiplied by the current price of its shares. Recent research has shown that shareholder value can be significantly impacted by severe supply chain disruptions. An example is Mattel, the worlds largest toymaker, who had to issue a major product recall due to quality issues. Mattels stock-price suffered a steep fall when the recall was announced in Q3 2007 and did not recover for many months after. Sales revenue: The revenues a company makes after the sale of its products. Supply chain disruptions or structural market shifts can impact a companys ability to deliver the value proposition and lead to loss of sales volume and sales revenue. Market share: The company's sales over the period divided by the total sales of the industry over the same period. Loss of delivery capability or damaged brand image can lead to market-share loss, especially, when the impact of a supply chain disruption is long-lasting. Earnings before income and taxes (EBIT) margin The earnings before interest and tax (EBIT) divided by total revenue. EBIT margin can provide an investor with a clearer view of a company's core profitability Total supply chain cost: The sum of fixed and variable costs to perform the plan, source, make and deliver functions for company products. Supply chain disruptions have an impact on total supply chain cost as a number of activities need to be expedited or redesigned across the various functions. Supply chain asset utilisation: Supply chain asset utilisation is a measure of actual use of supply chain assets divided by the available use of these assets. Assets include both fixed and moving assets. Fixed assets enable direct product development, transformation, and delivery of a companys products or services, as well as indirect support, and, typically, have greater than one year of service life. A disruption can directly impact the usability of assets and resources or cause their repositioning in order to recover. As a result, the utilisation of key assets and resources may deviate significantly from the set targets. Inventory turns: Inventory turnover ratio measures the efficiency of inventory management. It reflects how many times average inventory was produced and sold during the period. A disruption or change may impact inventory efficiency either by introducing increased obsolescence or by changing inventory positioning and consumption plans.
4 David

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Simchi-Levi, Phil Kminsky, Edith Simchi-Levi (2008). Designing and Managing The Supply Chain: Concepts, Strategies and Case Studies,3rd Edition. McGraw-Hill Irwin

 Customer service levels: The probability that a customer demand is met. The loss of delivery, customer communication or customer service capability due to a supply chain disruption can impact customer service levels. Order fulfilment lead-time: The average actual lead times consistently achieved, from order receipt to order entry complete, order entry complete to start build, start build to order ready for shipment, order ready for shipment to customer receipt of order. Total supply chain lead-time: Total supply chain lead-time in supply chain management is the time from the moment the customer places an order (the moment you learn of the requirement) to the moment it is received by the customer. In the absence of finished goods or intermediate (work in progress) inventory, it is the time it takes to actually manufacture the order without any inventory other than raw materials. Supply chain disruptions can introduce significant delays across all stages of the supply chain. Total supply chain lead-time variability: Total supply chain lead-time variability is the time variation around the total supply chain lead time mean. Exposure to incident disruptions introduces variability and fluctuations in the standard lead-time levels within the supply chain.

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About the Proj ject Tea am

Prof. Da avid Simc chi-Levi, MIT

Departme ent of Civil and Environmental Engineeri ing and the e Engineer ring Systems Division, Massachusetts Instit tute of Tec chnology Prof. Simchi-Levi is considered c to be one of the thou ght leaders s in supply chain management. Prof. Simchi-Levi hold ds a Ph.D. f from Tel Av viv University y. His resea arch currently focuses on develop ping and implemen nting robust t and efficie ent techniqu ues for logis stics and manufacturing systems. He has s published d widely in p professiona al journals on both practical p and d theoretica al aspects of o logistics a and supply y chain man nagement. H He is also the editor-in-chi e ief of Opera ations Rese earch, the f flag-ship jou urnal of INF FORMS, the e Institute fo or Operatio ons Researc ch and the Manageme ent Science es.

Ioannis M. Kyrat tzoglou

System Design D and d Managem ment Fellow w, Massachusetts Ins stitute of Technolo ogy nis M. Kyrat tzoglou is a Fellow at the t MITs S Sloan Schoo ol of Mr. Ioann Managem ment and the School of f Engineering. He hold ds a Master r of Science and a a Mech hanical Engineers Deg gree from M MIT in Mech hanical Engineeri ing. He is currently c a Principal P So oftware Sys stems Engin neer with the MITRE Corporat tion. His inte erests are in i software engineerin ng and data a analytics.

Constan ntine G. Vassiliad V is

l Manager, PwC, The Netherlan nds Principal Dr. Vassil liadis holds s a Ph.D. fro om Imperia al College, L London in P Process Systems Engineering. He has been b workin ng as a con nsultant on supply chain imp provement programs p with w compan nies world-w wide for the e past fifteen yea ars. In para allel, he is in nvolved in supply s chaiin research h and thought le eadership in nitiatives with leading academic institutions. .
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About The MIT Forum for Supply Chain Innovation

MIT Forum for Supply Chain Innovation The MIT Forum for Supply Chain Innovation is a community composed of academics and industry members whose support allows forum researchers to provide customer-focused solutions to design and manage the new supply chain. The Forum has pioneered a deeper understanding of the supply chain and its relationship to corporate strategy and has broad support from a wide cross-section of industry. http://supplychain.mit.edu/

MIT Forum Manufacturing Technology Advisory Board In June 2012, the MIT Forum launched the Manufacturing Technology Advisory Board in response to Forum members request for technology transformation guidance. The board consists of MIT academic and research leaders with major technology providers and industry leaders to collaborate on key issues around U.S. manufacturing. http://supplychain.mit.edu/news-events

For more information, please contact: Leslie Sheppard, Chief Strategy Officer Email: Lsheppar@mit.edu Tel: 617-852-2708

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